Emerging market (EM) official foreign exchange (FX) reserves have been falling steadily by an average of $58bn a month since reaching an all-time high of $8.17tn in June 2014. This has mainly been due to reductions in China and Russia, but is accentuated by declines elsewhere. Total reserves have also been falling year on year from December 2014, with the cumulative yearly decline accelerating to $385bn in March 2015 (see chart below).
Typically, reserve reductions indicate balance-of-payments pressures and/or central bank interventions in currency markets to dampen exchange rate depreciations. Greater exchange-rate flexibility across EMs and previous reserve accumulations alleviate most immediate concerns, including in China and Russia, but much depends on the direction of commodity prices and global market reactions to the eventual increase in US policy rates. Read more
The African migrant crisis is in the global headlines and rightfully so. It is high time people were talking about this dire problem and searching for solutions.
The European Union has announced its 10 point plan, focused on tackling human smugglers and with a changed approach to the migrant vessels that traffic tens of thousands heading for Europe every year, often with tragic consequences.
While these are crucial steps, African leaders should also work with the EU to make progress on another track entirely: solving the problem at its roots – making fundamental changes to the factors that contribute to these migrations. Because the problem starts here in Africa. Read more
India’s ecommerce market is on a rocket-like trajectory. The success of home-grown players such as Flipkart and Snapdeal has grabbed investor attention and now venture capitalists and global tech giants are flocking from China and elsewhere in the hope of finding India’s Alibaba – vital ammunition in the battle for the Indian middle class, which is set to outstrip that of the US in a matter of years. Read more
This year, global leaders could set the world on a path to overcoming extreme poverty by 2030. Achieving this will require political leaders to prioritise the very poorest, particularly girls and women. As diplomats negotiate in New York in preparation for a global meeting on Financing for Development in Addis Ababa in July, leaders and ministers must set their ambition high for what must be a game-changing conference.
ONE’s flagship 2015 Data Report, published today, calls for a deal between developed and developing countries to help the poorest in society prosper in the coming years. Read more
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In recent weeks, investors have been reminded how supposed risk-free assets, like Treasuries and bunds, can still inflict substantial losses. So far in the second quarter of this year, 10-year yields have risen by nearly 0.48 per cent in Germany and by 0.31 per cent in the US.
As a result, the JPMorgan GBI Global bond index is down 2.72 per cent in the year to date. With bond yields expected to drift higher as global growth and inflation pick up, this will continue to be the case. Puchasing bonds with wafer-thin yields means there is no cushion for capital losses.
Even locking in current bund yields of around 0.70 per cent, an investor would make a zero annual return if yields inch up by just another 0.07 per cent. A rise in yields of 0.25 per cent would be enough to erase dollar returns of ten-year Treasuries yielding 2.23 per cent today. Read more
In 1986 The Economist magazine famously created its Big Mac Index, a guide to the fair value of a currency based on the principle of purchasing-power parity, which states that exchange rates should adjust to bring prices of identical goods into line across national boundaries.
But Big Macs are not sold everywhere. Seeking a similar mechanism applicable to countries in Africa, we have created our Milk Index, based on the price of a gallon of milk. Read more
Even Western executives who are good at geography may have a hard time picking out Surat, Foshan and Porto Alegre on a map. Yet over the next decade, each of these cities will contribute more to global economic growth than Madrid, Milan or Zurich.
While China’s move to cut interest rates this month has sparked some concern about emerging-market growth, , we see no let-up in one of the most disruptive trends of our time: the shift of the world’s center of economic gravity from advanced economies to the developing world, and in particular, to rapidly growing cities in Asia, Latin American and Africa. Even at 6 to 7 per cent growth, China is adding the equivalent of a Canada to the global economy every two years.
We are currently living through the biggest mass migration from countryside to cities in human history. The global population of cities is growing by 65m people annually – that’s the equivalent of 7 Chicagos a year, every year. Between now and 2025, we calculate that 440 cities in developing countries will generate nearly half of global GDP growth. Read more
The least acknowledged economic race is gearing up for the starting line. Politics aside, the potential Iranian nuclear deal with the five permanent members of the United Nations Security Council plus Germany (P5+1) has led to multinational businesses focusing on the opportunities presented by a reconciliation with the Islamic Republic.
The magnetism of Iran as a destination for foreign investment is rooted in its large well educated workforce, richness in natural resources as well as, of course, its geopolitical importance.
In spite of sanctions, Iran has an established banking sector; infrastructural foundations in the transport, aviation and energy industries; a sophisticated consumer market that is conscious of international brands and products; a large number of port facilities and more than 20 free trade and special economic zones that are well placed to serve international companies. Read more
To many South American leaders, Chinese Premier Li Keqiang’s visit this week couldn’t come at a better time, and from a better country. China has been busy with Latin America, surpassing the United States as South America’s leading export destination outside of the region, according to the China-Latin America Economic Bulletin.
What is more, the ink is barely dry on big loan agreements to Venezuela and Ecuador, or a major China-Latin America cooperation plan signed in January that pledges to increase trade by $500bn and investment by $250bn and to cooperate on science and technology, trade, and environmental protection. Read more
To the dedicated follower of emerging markets it has been clear for some time that the Greek economy is no longer in a position to reduce its debt/GDP ratio. All the more so, given the lack of a flexible exchange rate tool to support the country’s one main export, namely tourism, which has provided extra backing at tough times for countries such as Turkey, Thailand or even Argentina.
Indeed, in spite of Greece having taken more painful fiscal adjustment measures than most of its EM peers, public sector debt/GDP remains at an excruciating 175 per cent, real GDP has failed to recover meaningfully, deposit withdrawals continue and unemployment pressure remains. This is highlighted in the charts below (click to enlarge), which compare Greece’s experience to those of EM crisis countries (“t” is the year each crisis began: t=2009 for Greece, 2008 for Latvia, 2001 for Turkey, 1999 for Argentina and 1997 for Thailand). Read more
Much has been said over the last six months about the collapse of the Russian economy as a result of sanctions and the falling oil price, on top of other negative factors such as bureaucracy and corruption, high inflation, inefficiencies in production, ageing infrastructure, a failure to innovate and diversify and capital flight. A slew of economic data point to a deep recession, and US President Barack Obama describes Russia’s economy as being in tatters. No one seems to be denying the long-term negative impact on the economy; even the government expects two tough years ahead, a prediction regarded as hopelessly optimistic by many economists.
However, anecdotally at least, it doesn’t feel like a financial meltdown here in Russia. Read more
Brazil’s economy – as beyondbrics readers know – is in serious trouble, and the unorthodox policies of the country’s embattled president, Dilma Rousseff, have been major contributors to the Brazilian real’s sharp depreciation. But as an analyst who has a long-held negative view on the Brazilian real, it is interesting to ask – at this moment – whether we might be missing something now that investor sentiment has caught up with our bearish stance on the currency.
In short, given the real’s steep drop since 2011, has Brazil’s currency hit a bottom? Read more
Obituaries have been written for the World Bank following the arrival of China’s Asian Infrastructure Investment Bank (AIIB), the implied question being whether the US remains willing and able to lead the global economic governance system. Yet the other Washington-based Bretton Woods institution, the International Monetary Fund, reveals a different story. It appears to be on the verge of a third epoch in which it is set to become indispensable, ushering in the global economic reforms now considered necessary in the ‘new mediocre’. Read more
By Wesley Wu-Yi Koo and Lizhi Liu
Behind China’s impressive economic rise is the biggest human migration in history. By 2013, some 269m rural residents had become migrant workers in cities, offering cheap labour and sustaining urban growth. However, unable to register and settle their family members in the cities, these migrant workers are forced to leave behind children, spouses, and old people in the villages. This has taken a tremendous toll on the rural society.
Today, there are 61m “left-behind children” and 40m “left-behind elderly” in Chinese villages. Some 79 per cent of the left-behind children are under the care of grandparents, who are often uneducated and lack parenting resources and energy. As a result, the academic scores of 88 per cent of these children fall below what would be the passing line in cities. Read more
Noticeable progress has been made recently in Chinese companies in the areas of capital structure, management and employee incentivisation.
It is has long been said – with some justification – that aligning interests between stakeholders in China was almost impossible. Consequently the majority holder, historically the government in most instances, would dictate expansion plans based on broader economic objectives rather than narrower shareholder return motivations. Read more
China is in the early stages of a domestic M&A boom unlike any other elsewhere in the world. Deal pricing, timing, terms, financing and structure are all markedly different than in other major economies, with likely consequences, good and bad, for global corporations and buyout firms eyeing M&A transactions in China.
For these two, as well as companies wishing to find a buyer in China, the game now is to learn the new rules of China M&A and then learn to use them to one’s advantage.
Chinese companies mainly pursue M&A for the same reasons others do – to improve margins, gain efficiencies and please investors. The main difference, and it’s a striking one, is that in most cases domestic Chinese corporate buyers, especially the publicly-quoted ones who are most active now trying to do deals, have no money to buy another business. Read more
Arguably the most revealing English translation of the French verb ‘étonner’ – at least in the context of Napoleon’s famous quip about China – is ‘to astonish’. “Ici repose un géant endormi, laissez le dormir, car quand il s’éveillera, il étonnera le monde” so the Corsican is said to have noted. “Here lies a sleeping giant, let him sleep, for when he wakes, he will astonish the world.”
Some 200 years later, that giant has awoken and Napoleon was right: China is now astonishing the world. In the past three decades, it has roused itself from a slumber to a state of almost unimaginable vibrancy. The roll-call of economic trophies it now claims is daunting: largest exporter, importer, foreign exchange reserve owner, commodity consumer, luxury goods market, most car sales, most internet users, even (in purchasing power parity terms) biggest economy. Read more
Imagine you’re a policymaker from an emerging economy, and you’re comfortable with the idea that your exchange rate needs to weaken. Maybe that’s because you’re a commodity exporter, and prices have fallen; or because global trade growth isn’t what it used to be, and your exports are weak; or because the prospect of higher US interest rates could make external financing less plentiful. Now, the question is, what would you rather see: a quick-and-nasty currency collapse? Or a fall in your currency’s value that’s smooth and sedately spread over time?
That’s the difference between Brazil and Russia. In the 12 months following February 2014 the rouble fell 30 per cent in trade-weighted, inflation-adjusted terms. But it took Brazil almost four years to achieve that same 30 per cent gain in competitiveness. What works better? Read more
Austria’s refusal to extradite Dmitry Firtash to the US is confirmation that Europe holds two contradictory positions on corruption. While the European Union urges Ukraine to fight corruption, some of its member states – such as Latvia, Cyprus (still the largest ‘foreign investor’ into Ukraine), the UK, Austria, France, Monaco and Switzerland, along with Caribbean offshore zones such as the Virgin Islands – continue to enjoy the fruits of corrupt proceeds that are laundered abroad.
Firtash, a Ukrainian gas mogul and former partner of Gazprom, had been charged in the US with involvement in an international racketeering conspiracy that allegedly paid $18.5m in bribes to government officials in India in exchange for permits to mine titanium for export to Boeing in Chicago. Read more
Margrethe Vestager is one of the most influential women in Danish politics but it was her recent decisions as European Commissioner for Competition to take on both Google and Gazprom that turned her into a globally recognised figure.
The two cases are very different. Google’s dominance may be a fleeting one and its alleged ability to impose on its customers an inferior service – search algorithms favouring its own products – is limited by the availability of competing search engines. Gazprom, in contrast, fits better the textbook idea of a monopolist: switching to alternative energy sources is a considerably less trivial exercise than making Bing your new homepage. Read more